British households are paying off their mortgages at a record pace, cutting their debt by £13bn in the first quarter of 2015 alone, according to figures from the Bank of England.
In an extraordinary reversal to the years running up to the financial crash, when households used their homes as cash machines to finance extensions, new cars and holidays, Britain’s mortgage holders are now paying their debt down.
The first quarter of 2015 marked the 28th successive quarter of net injection of equity into houses, taking the total to £313bn since June 2008.
The latest figures have surprised economists as they show an acceleration in repayments – called “net housing equity injection” – despite the improvement in the economy. The first quarter repayment figure of £13bn was a record high, up from £12.6bn in the first quarter and £11.1bn in the same quarter last year.
Consumer spending before the credit crunch was boosted by households using equity withdrawal on easy terms from lenders. At one point in 2006, equity withdrawal accounted for 4.7% of total spending in the economy. In stark contrast, the amount being paid off now represents 4.2% of post-tax income, as consumers reduce debt and improve their personal balance sheets.
Economists said historically low interest rates are encouraging households to reduce their mortgages rather than accumulate the money in deposit accounts paying miserably low rates of income.
Howard Archer of IHS Insight said: “There is a compelling case for many people to be looking to take advantage of very low mortgage interest rates to reduce their outstanding mortgage balances to improve their personal balance sheets – if they can afford to do so.
“Furthermore, extremely low savings interest rates have undeniably made it much more attractive for many people to use any spare funds that they have to reduce their mortgage balances rather than put the money into savings accounts.”
However, the Bank of England warns against assuming that British households have chosen parsimony over profligacy. The overall savings ratio, released last week, continues to show a worrying decline.
In past statements, the Bank has said the fall in equity withdrawal is likely to reflect a fall in the number of housing transactions, and is cautious about attributing it to decisions to actively pay down debt more quickly.